Cost Benefits
Cost Benefit Analysis What is cost benefit analysis?
Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period. The principles of cost-benefit analysis (CBA) are simple:
1. Appraisal of a project: It is an economic technique for project appraisal, widely used in business as well as government spending projects (for example should a business invest in a new information system)
2. Incorporates externalities into the equation: It can, if required, include wider social/environmental impacts as well as ‘private’ economic costs and benefits so that externalities are incorporated into the decision process. In this way, COBA can be used to estimate the social welfare effects of an investment
3. Time matters! COBA can take account of the economics of time – known as discounting. This is important when looking at environmental impacts of a project in the years ahead
Discounting the future
Would you rather have £1000 of income today or £1000 of income in the future (say in 3 years?). The answer is probably now, because £1000 in three years time is unlikely to buy as many goods and services as it does now (because of inflation). And also because £1000 put into a savings account today will yield interest.
Discounting is a widely used technique as part of cost benefit analysis. The technique of discounting reflects the following:
The value of a cost or benefit now > the value of a cost or benefit in future years
Discounting reflects this by reducing all future costs and benefits to express them as today’s values. The key question is: How do you choose an ‘interest rate’ for reducing future costs to give them a present value today?
Setting a general discount rate for new projects has important implications for the environment:
1. A low discount rate is often favoured by economists since they argue that investing a high proportion of current income is a good way of
Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period. The principles of cost-benefit analysis (CBA) are simple:
1. Appraisal of a project: It is an economic technique for project appraisal, widely used in business as well as government spending projects (for example should a business invest in a new information system)
2. Incorporates externalities into the equation: It can, if required, include wider social/environmental impacts as well as ‘private’ economic costs and benefits so that externalities are incorporated into the decision process. In this way, COBA can be used to estimate the social welfare effects of an investment
3. Time matters! COBA can take account of the economics of time – known as discounting. This is important when looking at environmental impacts of a project in the years ahead
Discounting the future
Would you rather have £1000 of income today or £1000 of income in the future (say in 3 years?). The answer is probably now, because £1000 in three years time is unlikely to buy as many goods and services as it does now (because of inflation). And also because £1000 put into a savings account today will yield interest.
Discounting is a widely used technique as part of cost benefit analysis. The technique of discounting reflects the following:
The value of a cost or benefit now > the value of a cost or benefit in future years
Discounting reflects this by reducing all future costs and benefits to express them as today’s values. The key question is: How do you choose an ‘interest rate’ for reducing future costs to give them a present value today?
Setting a general discount rate for new projects has important implications for the environment:
1. A low discount rate is often favoured by economists since they argue that investing a high proportion of current income is a good way of